** **

** **

**U.S. SECURITIES ANDEXCHANGE COMMISSION**WASHINGTON, D.C.  20549

 

# **FORM 10-Q**

 

| **(Mark One)**                                                                                      |       |                                                                                          |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                |       |                                                                                          |
| **ý**                                                                                          | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                                                                |       |                                                                                          |
| **For the quarterly period ended April 1, 2005 or**                                                 |
|                                                                                                |       |                                                                                          |
| **o**                                                                                               | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                |       |                                                                                          |
| **For the transition period from             to** |
|                                                                                                |       |                                                                                          |
| **Commission file number: 000-30575**                                                               |
|                                                                                                     |            |                                                                                               |  |  |

 

 

**AVOCENTCORPORATION**(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **91-2032368**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification Number) |
|                                                            |       |                                     |
| **4991 Corporate Drive  Huntsville, Alabama**                   | ** ** | **35805**                                |
| (Address  of Principal Executive Offices)                       |       | (Zip  Code)                              |

 

**256-430-4000**(Registrant’s Telephone Number, Including Area Code)

 

                Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934, asamended, during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

ý Yes  o No

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct of 1934, as amended).

 

ý Yes  o No

 

As of May 2, 2005, the number ofoutstanding shares of the Registrant’s Common Stock was 49,662,945.

 

 

 

**AVOCENTCORPORATION**

**FORM10-Q**

**April1, 2005**

 

**INDEX**

 
|      |                  | Page(s)                                                                                                      |
|-----------|-----------------------|--------------------------------------------------------------------------------------------------------------|
| Part I    | Financial Information |                                                                                                         |   |
|      |                  |                                                                                                         |   |   |
|      | Item 1.               | Financial Statements  (unaudited)                                                                            |   |   |
|      |                  |                                                                                                         |   |   |
|      |                  | Consolidated  Statements of Operations for the Three Months Ended April 1, 2005 and April  2, 2004           |   |   |
|      |                  | Consolidated Balance Sheets  at April 1, 2005 and December 31, 2004                                          |   |   |
|      |                  | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended April 1,  2005 and April 2, 2004 |   |   |
|      |                  |                                                                                                         |   |   |
|      |                  | Notes  to Condensed Consolidated Financial Statements                                                        |   |   |
|      |                  |                                                                                                         |   |   |
|      | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  |   |   |
|      |                  |                                                                                                         |   |   |
|      | Item  3.              | Quantitative  and Qualitative Disclosures about Market Risks.                                                |   |   |
|      |                  |                                                                                                         |   |   |
|      | Item 4.               | Controls and  Procedures                                                                                     |   |   |
|      |                  |                                                                                                         |   |   |
| Part II   | Other Information     |                                                                                                         |   |
|      |                  |                                                                                                         |   |
|      | Item 1.               | Legal Proceedings                                                                                            |   |   |
|      |                  |                                                                                                         |   |   |
|      | Item  2.              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                 |   |   |
|      |                  |                                                                                                         |   |   |
|      | Item 6.               | Exhibits                                                                                                     |   |   |
|      |                  |                                                                                                         |
| Signature |                  |                                                                                                         |
|           |                       |                                                                                                              |  |  |  |

 

 

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**AVOCENT CORPORATIONCONSOLIDATED STATEMENTS OFOPERATIONS**(Unaudited, in thousands, except per share data)

#### ** **

| ** **                                                    | ** **   | **For the three months ended** | ** **   |
|---------------------------------------------------------------|--------------|--------------------------------|--------------|
| ** **                                                    | ** **   | **April 1,  2005**             | ** **   | **April 2,  2004** | ** ** |
| ** **                                                    | ** **   |
| *** ***                                                  | *** *** | *** ***                   | *** *** | *** *** | *** *** |
| Net sales                                                     |         | $                              | 76,805       |   | $ | 86,085 |   |
| Cost of sales                                                 |         | 33,223                         |         | 35,983 |   |
| Gross profit                                                  |         | 43,582                         |         | 50,102 |   |
|                                                          |         |                           |         |   |   |
| Research and development expenses                             |         | 14,467                         |         | 9,428 |   |
| Acquired in-process research and development expense          |         | —                         |         | 6,490 |   |
| Selling, general and administrative expenses                  |         | 22,280                         |         | 20,335 |   |
| Amortization of intangible assets                             |         | 6,622                          |         | 4,762 |   |
| Total operating expenses                                      |         | 43,369                         |         | 41,015 |   |
|                                                          |         |                           |         |   |   |
| Income from operations                                        |         | 213                            |         | 9,087 |   |
|                                                          |         |                           |         |   |   |
| Net investment income                                         |         | 2,056                          |         | 1,251 |   |
| Net realized investment losses                                |         | (177                           | )            | (64 | ) |
| Other income (expense), net                                   |         | 61                             |         | (50 | ) |
|                                                          |         |                           |         |   |   |
| Income before provision for income taxes                      |         | 2,153                          |         | 10,224 |   |
| Provision for income taxes                                    |         | 319                            |         | 1,681 |   |
|                                                          |         |                           |         |   |   |
| Net income                                                    |         | $                              | 1,834        |   | $ | 8,543 |   |
|                                                          |         |                           |         |   |   |
| Earnings per share:                                           |         |                           |         |   |   |
| Basic                                                         |         | $                              | 0.04         |   | $ | 0.18 |   |
|                                                          |         |                           |         |   |   |
| Diluted                                                       |         | $                              | 0.04         |   | $ | 0.17 |   |
|                                                          |         |                           |         |   |   |
| Weighted average shares used in computing earnings per share: |         |                           |         |   |   |
| Basic                                                         |         | 50,208                         |         | 47,650 |   |
|                                                          |         |                           |         |   |   |
| Diluted                                                       |         | 51,452                         |         | 49,513 |   |

 

Seenotes accompanying these condensed consolidated financial statements.

 

3

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**AVOCENTCORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(Unaudited, in thousands, except per share data)

 
| ** **                                                                                                                                                                                          | ** **   | **April 1,  2005** | ** **   | **December  31, 2004** | ** **   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|-----------------------------|--------------|
| ** **                                                                                                                                                                                          | ** **   | ** **         |
| *** ***                                                                                                                                                                                        | *** *** | *** ***       | *** *** | *** ***                | *** *** |
| **ASSETS**                                                                                                                                                                                          |         |               |         |                        |         |
| Current assets:                                                                                                                                                                                     |         |               |         |                        |         |
| Cash and cash equivalents                                                                                                                                                                           |         | $                  | 47,786       |                        | $            | 44,724 |   |
| Investments maturing within one year                                                                                                                                                                |         | 193,560            |         | 195,075                     |         |
| Accounts receivable, net                                                                                                                                                                            |         | 50,034             |         | 60,948                      |         |
| Inventories, net                                                                                                                                                                                    |         | 24,316             |         | 21,232                      |         |
| Other current assets                                                                                                                                                                                |         | 7,541              |         | 5,923                       |         |
| Deferred tax assets, net                                                                                                                                                                            |         | 5,778              |         | 6,720                       |         |
| Total current assets                                                                                                                                                                                |         | 329,015            |         | 334,622                     |         |
| Investments                                                                                                                                                                                         |         | 82,846             |         | 90,217                      |         |
| Property held for lease, net                                                                                                                                                                        |         | 1,281              |         | 1,330                       |         |
| Property and equipment, net                                                                                                                                                                         |         | 39,328             |         | 39,896                      |         |
| Goodwill                                                                                                                                                                                            |         | 270,001            |         | 269,892                     |         |
| Other intangible assets, net                                                                                                                                                                        |         | 27,421             |         | 33,981                      |         |
| Other assets                                                                                                                                                                                        |         | 887                |         | 843                         |         |
| Total assets                                                                                                                                                                                        |         | $                  | 750,779      |                        | $            | 770,781 |   |
|                                                                                                                                                                                                |         |               |         |                        |         |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                       |         |               |         |                        |         |
| Current liabilities:                                                                                                                                                                                |         |               |         |                        |         |
| Accounts payable                                                                                                                                                                                    |         | $                  | 6,664        |                        | $            | 9,171 |   |
| Accrued wages and commissions                                                                                                                                                                       |         | 8,536              |         | 12,197                      |         |
| Accrued liabilities                                                                                                                                                                                 |         | 15,020             |         | 15,661                      |         |
| Income taxes payable                                                                                                                                                                                |         | 8,356              |         | 8,494                       |         |
| Other current liabilities                                                                                                                                                                           |         | 1,495              |         | 1,106                       |         |
| Total current liabilities                                                                                                                                                                           |         | 40,071             |         | 46,629                      |         |
|                                                                                                                                                                                                |         |               |         |                        |         |
| Deferred tax liabilities, net                                                                                                                                                                       |         | 6,004              |         | 8,985                       |         |
| Other non-current liabilities                                                                                                                                                                       |         | 1,708              |         | 1,870                       |         |
| Total liabilities                                                                                                                                                                                   |         | 47,783             |         | 57,484                      |         |
|                                                                                                                                                                                                |         |               |         |                        |         |
| Commitments and contingencies                                                                                                                                                                       |         |               |         |                        |         |
|                                                                                                                                                                                                |         |               |         |                        |         |
| Stockholders’ equity:                                                                                                                                                                          |         |               |         |                        |         |
| Preferred stock, $0.001 par value; 5,000 shares authorized, no shares  issued and outstanding as of April 1, 2005 and December 31, 2004,  respectively                                              |         | —             |         | —                      |         |
| Common stock, $0.001 par value; 200,000 shares authorized, April 1,  2005 — 50,733 shares issued and 49,933 outstanding; December 31, 2004 —  50,332 shares issued and 50,232 outstanding |         | 51                 |         | 50                          |         |
| Additional paid-in capital                                                                                                                                                                          |         | 1,085,139          |         | 1,075,171                   |         |
| Accumulated other comprehensive loss                                                                                                                                                                |         | (807               | )            | (56                         | )            |
| Deferred compensation                                                                                                                                                                               |         | (1,529             | )            | (2,038                      | )            |
| Accumulated deficit                                                                                                                                                                                 |         | (354,018           | )            | (355,852                    | )            |
| Treasury stock, at cost; April 1, 2005 — 800 shares; December 31,  2004 — 100 shares                                                                                                 |         | (25,840            | )            | (3,978                      | )            |
| Total stockholders’ equity                                                                                                                                                                     |         | 702,996            |         | 713,297                     |         |
| Total liabilities and stockholders’ equity                                                                                                                                                     |         | $                  | 750,779      |                        | $            | 770,781 |   |
|                                                                                                                                                                                                     |              |                    |              |                             |              |  |  |  |  |

 

Seenotes accompanying these condensed consolidated financial statements.

 

4

----

** **

**AVOCENTCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited,in thousands)

 
| ** **                                                                         | ** **   | **For the three months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|--------------------------------|--------------|
| ** **                                                                         | ** **   | **April 1,  2005**             | ** **   | **April 2,  2004** | ** ** |
| ** **                                                                         | ** **   | ** **                     | ** **   |
| *** ***                                                                       | *** *** | *** ***                   | *** *** | *** *** | *** *** |
| Cash flows from operating activities:                                              | * *     | * *                       | * *     | * * | * * |
| Net income                                                                         |         | $                              | 1,834        |   | $ | 8,543 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |         |                           |         |   |   |
| Depreciation                                                                       |         | 1,576                          |         | 1,594 |   |
| Amortization of intangible assets                                                  |         | 6,622                          |         | 4,762 |   |
| Stock-based compensation                                                           |         | 509                            |         | 722 |   |
| Acquired in-process research and development expenses                              |         | —                         |         | 6,490 |   |
| Amortization of premiums on investments                                            |         | 431                            |         | 1,495 |   |
| Net loss on sales of investments                                                   |         | 177                            |         | 64 |   |
| Income tax benefit from exercise of stock options                                  |         | 1,904                          |         | 1,238 |   |
| Changes in operating assets and liabilities (net of effects of  acquisition):      |         |                           |         |   |   |
| Accounts receivable, net                                                           |         | 10,912                         |         | (4,204 | ) |
| Inventories, net                                                                   |         | (3,084                         | )            | (1,178 | ) |
| Other assets                                                                       |         | (1,860                         | )            | 331 |   |
| Accounts payable                                                                   |         | (2,504                         | )            | (972 | ) |
| Accrued wages and commissions                                                      |         | (3,661                         | )            | (3,464 | ) |
| Accrued liabilities                                                                |         | (287                           | )            | (2,290 | ) |
| Income taxes, current and deferred                                                 |         | (2,415                         | )            | 252 |   |
| Net cash provided by operating activities                                          |         | 10,154                         |         | 13,383 |   |
| ** **                                                                         | ** **   | ** **                     | ** **   | ** ** | ** ** |
| Cash flows from investing activities:                                              |         |                           |         |   |   |
| Purchase of Crystal Link, net of cash received (1)                                 |         | —                         |         | (3,311 | ) |
| Purchases of property and equipment                                                |         | (1,008                         | )            | (1,370 | ) |
| Purchases of investments                                                           |         | (67,898                        | )            | (52,751 | ) |
| Maturities and proceeds from sales of investments                                  |         | 75,663                         |         | 75,232 |   |
| Net cash provided by investing activities                                          |         | 6,757                          |         | 17,800 |   |
| ** **                                                                         | ** **   | ** **                     | ** **   | ** ** | ** ** |
| Cash flows from financing activities:                                              | ** **   | ** **                     | ** **   | ** ** | ** ** |
| Repayment of debt assumed at the acquisition of Crystal Link                       |         | —                         |         | (1,798 | ) |
| Proceeds from employee stock option exercises                                      |         | 5,956                          |         | 5,148 |   |
| Proceeds from employee stock purchase plan                                         |         | 2,107                          |         | 1,371 |   |
| Purchases of treasury stock                                                        |         | (21,862                        | )            | — |   |
| Net cash provided by (used in) financing activities                                |         | (13,799                        | )            | 4,721 |   |
|                                                                               |         |                           |         |   |   |
| Effect of exchange rate changes on cash and cash equivalents                       |         | (50                            | )            | 135 |   |
|                                                                               |         |                           |         |   |   |
| Net increase in cash and cash equivalents                                          |         | 3,062                          |         | 36,039 |   |
| Cash and cash equivalents at beginning of period                                   |         | 44,724                         |         | 76,492 |   |
| Cash and cash equivalents at end of period                                         |         | $                              | 47,786       |   | $ | 112,531 |   |

 

----

(1)          Supplementaldisclosure — In addition to the cash paid to Crystal Link shareholders, weissued 106 shares of our common stock valued at $3,500. The issuance of commonstock was recorded as non-cash consideration for the acquisition.

 

 

Seenotes accompanying these condensed consolidated financial statements.

 

 

5

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**AVOCENTCORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited,in thousands, except per share data)

 

Note 1.   Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared in conformitywith generally accepted accounting principles and reflect all adjustmentsconsisting of normal recurring adjustments which, in the opinion of management,are necessary for a fair presentation of the results for the periods shown.  The results of operations for these periodsare not necessarily indicative of the results expected for the full fiscal yearor for any future periods.  Thepreparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates and assumptions.

 

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2004, which is on file with the Securities and Exchange Commission and isavailable at our website, www.avocent.com. The balance sheet presented in theaccompanying financial statements for December 31, 2004, was derived from theaudited financial statements filed in our 10-K for the period ended December31, 2004.

 

We report ourannual results based on years ending December 31.  We report our quarterly results for the firstthree interim periods based on 13 week periods ending on Fridays and for thefourth interim period ending on December 31.

 

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries. Significant inter-company transactions and balances have been eliminatedin consolidation.

 

Note 2.   Inventories

 

Inventoriesconsisted of the following at:

 
| ** **       | ** ** | **April 1,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|--------------------|------------|------------------------|------------|
| ** **       | ** ** | ** **         | ** ** | ** **             | ** ** |
| Raw materials    |       | $                  | 4,976      |                   | $          | 4,411 |   |
| Work-in-process  |       | 620                |       | 356                    |       |
| Finished goods   |       | 18,720             |       | 16,465                 |       |
| Inventories, net |       | $                  | 24,316     |                   | $          | 21,232 |   |

 

Inventories above have been reduced by reserves forexcess and obsolete inventories of $4,134 and $3,785 as of April 1, 2005 andDecember 31, 2004, respectively.

 

Note 3.   StockOptions, Deferred Compensation and Treasury Stock

 

                Deferredcompensation — We recorded $41,165 of deferred compensation related to Cybexemployee stock options at the time of the merger of Apex and Cybex on July 1,2000, $2,752 of deferred compensation related to the Equinox employee stockoptions at the time of the acquisition on January 3, 2001 and $6,350 ofdeferred compensation related to the OSA employee stock options at the time ofthe acquisition on April 6, 2004.  Thedeferred compensation is being amortized over the vesting period of the optionsfor which it was recorded. Amortization of deferred compensation totaled $509and $722 for the quarters ended April 1, 2005 and April 2, 2004, respectively.

 

                Stock option exercises — Shares of our common stockissued as a result of option exercises totaled 314 shares during the quarterended April 1, 2005 and 254 shares during the quarter ended April 2, 2004.  Total proceeds received from these optionexercises were $5,956 for the quarter ended April 1, 2005 and $5,148 for thequarter ended April 2, 2004. Additionally, common stock issued under ourEmployee Stock Purchase Plan totaled 87 shares during the quarter ended April1, 2005 and 89 shares during the quarter ended April 2, 2004.  Total proceeds received from the sharesissued under the ESPP were $2,107 for the quarter ended April 1, 2005 and$1,371 for the quarter ended April 2, 2004.

 

6

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Stockrepurchases — We repurchased 700 shares of our common stock during the quarterended April 1, 2005 at a cost totaling $21,862. These treasury shares werepurchased on the open market through various brokers under the stockre-purchase plan approved by our Board of Directors during the fourth quarterof 2004.

 

Note 4.   AccumulatedOther Comprehensive Income (Loss)

 

We record unrealized gains and losseson our foreign currency translation adjustments and unrealized holding gains orlosses on our available-for-sale securities, net of tax, as accumulated othercomprehensive income (loss), which is included as a separate component ofstockholders’ equity. Comprehensive income in the first quarter of 2005 of$1,083 consists of $1,834 of net income, $513 of unrealized losses oninvestments (net of deferred income taxes) and $238 of foreign currencytranslation adjustments. Comprehensive income in the first quarter of 2004 of$8,359 consists of $8,543 of net income, $49 of unrealized losses oninvestments (net of deferred income taxes) and $135 of foreign currencytranslation adjustments.  As of April 1, 2005 and December 31,2004, total accumulated other comprehensive income (loss) was $(807) and $(56),respectively.

 

Note 5.   EarningsPer Share

 
| ** **                                                          | ** ** | **Income (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | ** **             | ** ** | ** **                | ** ** | ** **            | ** ** |
| **For the three months ended April 1, 2005**                        |       |                   |       |                      |       |                  |       |
| **Basic EPS**                                                       |       |                   |       |                      |       |                  |       |
| Net income available to common stockholders                         |       | $                      | 1,834      |                      | 50,208     |                  | $          | 0.04 |   |
| **Effect of Dilutive Securities**                                   |       |                   |       |                      |       |                  |       |
| Stock options                                                       |       | —                 |       | 1,244                     |       | —                |       |
| **Diluted EPS**                                                     |       |                   |       |                      |       |                  |       |
| Net income available to common stockholders and assumed conversions |       | $                      | 1,834      |                      | 51,452     |                  | $          | 0.04 |   |
|                                                                |       |                   |       |                      |       |                  |       |
| **For the three months ended April 2, 2004**                        |       |                   |       |                      |       |                  |       |
| **Basic EPS**                                                       |       |                   |       |                      |       |                  |       |
| Net income available to common stockholders                         |       | $                      | 8,543      |                      | 47,650     |                  | $          | 0.18 |   |
| **Effect of Dilutive Securities**                                   |       |                   |       |                      |       |                  |       |
| Stock options                                                       |       | —                 |       | 1,863                     |       | —                |       |
| **Diluted EPS**                                                     |       |                   |       |                      |       |                  |       |
| Net income available to common stockholders and assumed conversions |       | $                      | 8,543      |                      | 49,513     |                  | $          | 0.17 |   |

 

Note 6.   Sales by Geographic Region and Customer Type

** **

Wehave evaluated, and will periodically re-evaluate, our business in light of thesegment reporting requirements prescribed by SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.*  We have determined that we should report ouroperations as a single operating segment. However, we supplementally report net sales by geographic region, aswell as by customer type.  Following is apresentation of net sales by geographic region and by customer type for thethree months ended April 1, 2005 and April 2, 2004:

** **
| ** **        | ** ** | **For the three months ended** | ** ** |
|-------------------|------------|--------------------------------|------------|
| ** **        | ** ** | **April 1,  2005**             | ** ** | **April 2,  2004** | ** ** |
| Net sales:        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| United States     |       | $                              | 39,964     |   | $ | 51,190 |   |
| Rest of the World |       | 36,841                         |       | 34,895 |   |
|              |       | $                              | 76,805     |   | $ | 86,085 |   |

** **

** **

**7**

----

** **
| ** ** | ** ** | **For the three months ended** | ** ** |
|------------|------------|--------------------------------|------------|
| ** ** | ** ** | **April 1,  2005**             | ** ** | **April 2,  2004** | ** ** |
| Net sales: | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Branded    |       | $                              | 36,727     |   | $ | 50,710 |   |
| OEM        |       | 40,078                         |       | 35,375 |   |
|       |       | $                              | 76,805     |   | $ | 86,085 |   |

** **

Wesell our products internationally to customers in several countries. Sales tocustomers in the Netherlands, including the European distribution facility forone of our OEM customers, accounted for 11% and 10% of sales in the firstquarter of 2005 and 2004, respectively. No other country accounted for more than 10% of sales in the firstquarter of either 2005 or 2004.

** **

**As of April 1, 2005, long-lived assets totaled $338,031,which includes $317,043 held in the U.S. and $20,988 held outside of theU.S.  As of December 31, 2004, long-livedassets totaled $345,099, which includes $324,417 held in the U.S. and $20,682 heldoutside of the U.S.**

** **

**Note 7.   ForwardContracts**

** **

We use forward contracts to reduce our foreign currencyexposure related to the net cash flows from our international operations. The majorityof these contracts are short-term contracts (three months or less) and aremarked-to-market each quarter and included in trade payables, with theoffsetting gain or loss included in other income (expense) in the accompanyingconsolidated statements of operations. As of April 1, 2005, and December 31,2004, we had one open forward contract with a fair value of zero.

** **

**Note 8.   Goodwill andOther Intangible Assets**

** **

**Acquired other intangible assetssubject to amortization were as follows:**

** **
| ** **                       | ** ** | **April 1, 2005**            | ** ** | **December 31, 2004**         | ** ** |
|----------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                             |       |                         |       |                          |       |   |   |   |   |
| Developed technology             |       | $                            | 80,560     |                          | $          | 66,715 |   | $ | 80,560 |   | $ | 62,293 |   |
| Patents and trademarks           |       | 21,617                       |       | 15,523                        |       | 21,508 |   | 14,318 |   |
| Customer base and certifications |       | 6,483                        |       | 2,360                         |       | 6,483 |   | 1,961 |   |
| Non-compete agreements           |       | 5,793                        |       | 3,553                         |       | 5,793 |   | 3,070 |   |
| Other                            |       | 1,814                        |       | 695                           |       | 1,814 |   | 535 |   |
|                             |       | $                            | 116,267    |                          | $          | 88,846 |   | $ | 116,158 |   | $ | 82,177 |   |
|                                  |            |                              |            |                               |            |  |  |  |  |  |  |  |  |  |  |

** **

**For the three months ended April 1,2005 and April 2, 2004, amortization expense for other intangible assets was$6,622 and $4,762, respectively.  Theapproximate estimated annual amortization for other intangibles is as follows:**

** **
| **Years ending December 31:** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2005                          |       | $          | 19,600     |   |
| 2006                          |       | $          | 9,400      |   |
| 2007                          |       | $          | 3,500      |   |
| 2008                          |       | $          | 1,100      |   |
| 2009                          |       | $          | 381        |   |
|                               |            |            |            |  |  |  |

** **

**For the three months ended April 1,2005, we recorded $109 of additional goodwill related to the Crystal LinkTechnologies acquisition.**

** **

** **

**8**

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** **

**Note9.  Product Warranties**

 

                The activity within the liability for warranty returnsfor the quarter ended April 1, 2005:

 

| ** **                                               | ** ** | **2005** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
|                                                     |       |     |       |
| Balance, January 1, 2005                                 |       | $        | 2,760      |   |
|                                                     |       |     |       |
| Accruals for product warranties issued during the period |       | 39       |       |
|                                                     |       |     |       |
| Settlements made during the period                       |       | (32      | )          |
| Balance, April 1, 2005                                   |       | $        | 2,767      |   |
|                                                          |            |          |            |  |  |

 

Deferredrevenue related to our extended warranty program was $1,714 for the threemonths ended April 1, 2005.  We recordedearned revenue from the amortization of deferred revenue related to extendedwarranties of $173 for the three months ended April 1, 2005.  In addition, we recorded new extendedwarranties of $222 during the three months ended April 1, 2005.

 

Note 10. Effective Tax Rate

 

The effective tax ratein the first quarter of 2005 was approximately 14.8% compared to an effectivetax rate of approximately 16.4% in the first quarter of 2004.  The provision for income taxes wasapproximately $319 for the first quarter of 2005, compared to $1.7 millionin the first quarter of 2004.  Thereduction in provision for income taxes was partly the result of the change inmix of our pre-tax profit among our U.S. and international companies.   As a result of lower than expected earningsin the U.S. in the first quarter of 2005, the pre-tax profit attributable toour international operations was higher than that experienced in recentquarters.  In addition, the provision forincome taxes for the first quarter of 2005 was reduced by approximately $133related to a tax benefit expected to be realized from the settlement of a taxcontingency.

 

Note 11. Patent Dispute

 

In May 2001, wefiled a complaint for patent infringement in the United States District Courtfor the Southern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree patents.  After a seven day benchtrial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of these patents by Raritan and ordered thatjudgment be entered in favor of Raritan.

 

InApril 2003, the United States Court of Appeals for the Federal Circuit issuedits ruling on our appeal in this patent litigation.  The Court of Appeals ruled in our favor byvacating the non-infringement decision of the District Court for the SouthernDistrict of New York and remanding the case for further proceedings consistentwith the Court of Appeals’ opinion.

 

In September 2003, Raritan petitioned the UnitedStates Supreme Court for a Writ of Certiorari to review the Court of Appealsdecision.  The Supreme Court declined toreview Raritan’s petition in December 2003, and the case was sent back to theUnited States District Court for the Southern District of New York. A Markmanhearing on claims construction was held in February 2005.  This case is currently scheduled for a newtrial in May 2005.

 

In October 2003, we filed a complaint for patentinfringement in the United States District Court for the Northern District ofAlabama against ClearCube Technology, Inc. The ClearCube complaint seeks injunctive relief, damages, attorneys’fees, and costs under three of our patents. ClearCube has filed counterclaimsalleging non-infringement, unenforceability, invalidity, and misuse of theAvocent patents. A Markman hearing on claims construction wasoriginally set for February 2005, but in response to an inquiry from the Court,we agreed that the hearing should be postponed until the 

 

9

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UnitedStates Court of Appeals for the Federal Circuit issues its ruling on certainsimilar issues raised in an unrelated patent case.

 

**Note 12.  Stock BasedCompensation**

** **

**We apply Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations in accounting for our stock plans. Had compensation cost forour stock-based compensation plans been determined based on the fair value atthe grant dates for awards under those plans consistent with the methodprescribed in SFAS No. 123, *Accounting for Stock-BasedCompensation*, our net income and earnings per share would have beenreduced to the pro forma amounts indicated below for the three months endedApril 1, 2005 and April 2, 2004.**

** **

| ** **                                                                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income — as reported                                                                                                          |       | $        | 1,834      |     | $          | 8,543 |   |
| Add: Stock-based employee compensation expense included in reported  net income, net of related tax effects                            |       | 509      |       | 677      |       |
| Deduct: Total stock based employee compensation expense determined  under fair value method for all awards, net of related tax effects |       | 5,019    |       | 7,060    |       |
| Net income (loss) — pro forma                                                                                                     |       | $        | (2,676     | )        | $          | 2,160 |   |
|                                                                                                                                   |       |     |       |     |       |
| Basic earnings per share — as reported                                                                                            |       | $        | 0.04       |     | $          | 0.18 |   |
| Basic earnings (loss) per share — pro forma                                                                                       |       | $        | (0.05      | )        | $          | 0.05 |   |
| Diluted earnings per share — as reported                                                                                          |       | $        | 0.04       |     | $          | 0.17 |   |
| Diluted earnings (loss) per share — pro forma                                                                                     |       | $        | (0.05      | )        | $          | 0.04 |   |
|                                                                                                                                        |            |          |            |          |            |  |  |  |  |

 

Thepro forma amounts reflected above are not representative of the effects onreported net income in future years because, in general, the options grantedtypically do not vest for several years and additional awards are made eachyear. The fair value of each option grant is estimated on the grant date usingthe Black-Scholes option-pricing model using the following weighted-averageassumptions:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Dividend yield          |       | 0.0      | %          | 0.0      | %          |
| Expected life (years)   |       | 4.5      |       | 4.5      |       |
| Expected volatility     |       | 47.0     | %          | 55.0     | %          |
| Risk-free interest rate |       | 3.81     | %          | 2.79     | %          |

** **

**Note 13. RecentlyIssued Accounting Standards and Regulatory Standards**

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), *Share based Payment*, which replaces SFAS No. 123. *Accounting for Stock Based Compensation* and APB Opinion No25 *Accounting for Stock Issued to Employees*.  SFAS 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair-values beginning with the firstannual period after June 15, 2005.  Thepro-forma disclosures previously permitted under SFAS No. 123 no longer will bean alternative to inclusion of the expense in the financial statements.  We are required to adopt SFAS 123R beginningJanuary 1, 2006.  Under SFAS 123R, wemust determine the appropriate fair value model to be used for valuingshare-based payments, the amortization method for compensation cost and thetransition method to be used at date of adoption.  The transition methods include prospectiveand retroactive adoption options. We expect to utilize the prospective methodwhich requires that compensation expense begin being recorded for all unvestedstock options and restricted stock at the beginning of the first quarter ofadoption of SFAS 123R.  We are evaluatingthe requirements of SFAS 123R and expect the adoption of SFAS 123R will have amaterial impact on our consolidated results of operations and earnings per share.  We have not determined the effect of adoptingSFAS 123R and we have not determined whether the adoption will result inamounts similar to the current pro-forma disclosures under SFAS 123.  Under the current approach of SFAS 123 wewould have unamortized fair value of unvested stock options of 

 

 

10

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approximately $15,000 forcurrently outstanding stock options to be recognized as expense in our incomestatements after 2005, prior to the acceleration of vesting discussed in note14.  Following this acceleration webelieve the balance to be expensed in future periods would be reduced toapproximately $2,000 for currently outstanding stock options under the SFAS 123methodology.

 

OnOctober 22, 2004, the American Jobs Creation Act of 2004 became law. Thislegislation repeals export tax benefits, which have historically reduced oureffective tax rate. This legislation phases in the repealed export tax benefitsby allowing 100 percent of the repealed export benefits in 2004, 80 percent in2005 and 60 percent in 2006. We do not expect this change to have a materialimpact on our effective tax rate or provision for taxes.

 

Thelegislation also transitions in a new tax deduction for qualifying U.S.manufacturing activities. Under the guidance in FASB Staff Position No. FAS109-1 which articulates the application of SFAS 109, “Accounting for Income Taxes,”to the tax deduction on qualified production activities provided by this Act,the deduction will be treated as a “special deduction” as described in SFAS109. As such, we expect the new manufacturing activities deduction provision ofthe new legislation will reduce our effective rate in future periods as thededuction is taken on our tax returns.

 

Thelegislation also provides for the optional repatriation of earnings fromforeign subsidiaries allowing an 85 percent dividends received deduction. Thededuction is subject to a number of limitations.   We have not yet initiated an analysis nordetermined if we will repatriate any overseas earnings pursuant to thisprovision.  If our intention topermanently reinvest overseas earnings in our overseas operations changes andwe decide to repatriate any of the earnings to the U.S., we would incuradditional income tax expense equal to the incremental U.S. income tax inexcess of the credits available for taxes already paid overseas.

** **

**Note14. Subsequent Events**

During the period from April 2, 2005 through May 2, 2005, we repurchased275 additional shares of our common stock on the open market under our Boardapproved stock repurchase program, for a total cost of $6,852.  On April 29, 2005 our Board of Directorsauthorized the repurchase of an additional 2,000 shares of our common stock tobe repurchased under the stock repurchase program. A total of 4,000 shares isauthorized to be repurchased under the board approved program, 1,075 of whichhad been repurchased as of May 2, 2005.

On April 29, 2005, our Board of Directors approved a plan to acceleratevesting of all currently outstanding stock options with an exercise price ofgreater than $25.00 which are unvested on December 25, 2005. Under theprovisions of APB 25, we estimate that there will be no compensation expenserelated to accelerating these options as the options affected by theacceleration had exercise prices higher that the closing price of our commonstock as of the modification date.  As aresult of the Board’s action, stock options to purchase approximately 1,100shares of our common stock will become exercisable effective December 25,2005.  The exercise prices of theaffected stock options range from $25.17 to $41.57 per share.  The closing price of Avocent’s common stockon April 29, 2005 was $25.14.

 

11

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**I**tem 2.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTSRELATING TO OUR FUTURE BUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL;STATEMENTS REGARDING OUR ABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORYLEVELS; STATEMENTS REGARDING PRICING PRESSURE; STATEMENTS REGARDING THEFLUCTUATION OF OUR REVENUE GROWTH IN RELATION TO ECONOMIC CONDITIONS AND ITRELATED SPENDING TRENDS; STATEMENTS REGARDING OUR PRODUCT PLATFORMS ANDOUR  ABILITY TO RESUME GROWTH IN OUROVERALL BUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTSAND EMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES ANDCOMPETITIVE FACTORS; STATEMENTS REGARDING OUR GROSS MARGINS, OUR RESEARCH ANDDEVELOPMENT EXPENSES AND OUR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES INTHE SECOND QUARTER OF 2005; STATEMENTS REGARDING OUR SARBANES-OXLEY COMPLIANCECOSTS; STATEMENTS REGARDING OUR LEGAL COSTS FOR PATENT LITIGATION CASES; ANDSTATEMENTS REGARDING THE IMPACT OF SFAS 123R ON OUR RESULTS OF OPERATIONS ANDEARNINGS PER SHARE.*

 

*THESE FORWARD-LOOKINGSTATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OURACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THEFORWARD-LOOKING STATEMENTS.  FACTORS THATMIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE RISKSASSOCIATED WITH GENERAL ECONOMIC CONDITIONS, RISKS ASSOCIATED WITH THEINTRODUCTION OF NEW PRODUCTS, RISKS ATTRIBUTABLE TO FUTURE PRODUCT DEMAND,SALES, AND EXPENSES, RISKS ASSOCIATED WITH PRODUCT DESIGN EFFORTS, RISKSASSOCIATED WITH RELIANCE ON A LIMITED NUMBER OF COMPONENT SUPPLIERS AND SINGLESOURCE COMPONENTS, THE LOSS OF ONE OF OUR OEM CUSTOMERS, A REDUCTION ORFLUCTUATIONS IN SALES OF OUR OEM OR BRANDED PRODUCTS, INTENSE COMPETITION ANDNEW PRODUCTS AND TECHNOLOGIES FROM EXISTING AND NEW COMPETITORS, RISKS RELATEDTO OBTAINING AND PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, FLUCTUATIONS INFOREIGN CURRENCIES, RISKS RELATED TO ACQUISITIONS AND THEIR SUBSEQUENTINTEGRATION, AND OTHER RISKS DETAILED IN OUR ANNUAL REPORT ON FORM 10-K, WHICH WAS FILED WITH THE SECURITIES ANDEXCHANGE COMMISSION ON MARCH 14, 2005.*

** **

**Overview**

 

Avocentdesigns, manufactures, licenses, and sells solutions that provide connectivityand centralized management of IT infrastructure.  We provide connectivity and managementproducts and technologies that centralize control of servers, mobile devices,and network appliances, increasing the efficiency of IT personnel. Servermanufacturers rely on Avocent KVM switches and embedded technology in theirsystems, and companies large and small depend on our products and technologiesfor managing their growing IT infrastructure.

 

Our innovations includeIP-based switching, centralized management, and intuitive software interfaces.Our products and technologies manage servers, serial devices, wireless devices,mobile devices, and embedded infrastructure. With more than two decades ofexperience, we have grown through product innovations, global expansion, andstrategic acquisitions.  Formed as aresult of the merger in 2000 between Apex Inc. and Cybex Computer ProductsCorporation, we subsequently acquired Equinox Systems Inc. in 2001, 2CComputing, Inc. in 2002, Soronti, Inc. in 2003, and Crystal Link Technologies,OSA Technologies, Inc., and Sonic Mobility, Inc. in 2004.

 

Our KVM switching systemseliminate the need for extra keyboards, monitors, and mice and allow businessesto save critical space in their data centers. Our KVM over IP switching systems eliminate distance limitations andprovide 24/7 access and control of an almost unlimited number of servers, evenwhen the servers are dispersed in different physical locations.  Our *DSView* softwaremanagement and KVM over IP switching systems allow IT managers to use a singleconsole to gain secure, local and remote access and control of servers andother network data center devices from any location.

 

Our innovative advances forthe data center include multi-platform switching, analog matrix switching, KVMextension over CAT 5, PCI bus extension, a proprietary on-screen menu switchingsystem, remote KVM over IP connectivity, digital serial over IP, digital-analogintegrated access to multiple servers, intelligent platform managementinterface (IPMI) solutions, wireless KVM, PDA and hand-held managementsolutions, and centralized management software for access and control of networkinfrastructure.

 

Our DSSeries*®*switches are revolutionary in the industry.  They combine analog and digital connections,serial connectivity, and external modem support in one switch. These appliancesintegrate our KVM over IP switching technology and CAT 5 connectivity.  IT managers and network administrators gainworldwide access and control of their servers and serial devices and can trackthem all from a single computer screen. In addition, we provide plug and play switching systems for the manynetwork administration, management, and storage problems faced by corporatecustomers, data centers, and mid-size businesses. Our connectivity solutionsinclude products and technologies sold or licensed under the Avocent, Cybex,and Equinox brands, including our *AMX*TM,***AutoView*TM*, Cstation*TM,*DSView®, DS Series, LongView*TM*,**OutLook®, SuperSerial*,*SwitchView® , Emerge*TM, *SonicAdmin*TM, and *SonicSentinel*TMproducts.

 

 

12

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We market and sell ourproducts around the world to a diversified group of original equipmentmanufacturers (OEMs) dealers, distributors, resellers, and end users, primarilythrough our sales and customer support staff, advertisements in tradepublications, and participation in major industry trade shows.

 

A substantial portion of ourrevenue is derived from sales to major server OEMs who purchase our switchingsystems on a private-label or branded basis for integration and sale with theirown products, sales through our reseller and distributor network, and sales toa limited number of direct customers. Sales to our OEM customers accounted for52% of sales in the first quarter of 2005 and 41% of sales in the first quarterof 2004.  Sales to our branded customersaccounted for 48% of sales in the first quarter of 2005 and 59% of sales in thefirst quarter of 2004. We do not have contracts with many of our brandedcustomers, and in general, our OEM and branded business customers are obligatedto purchase products from us only pursuant to binding purchase orders.  The loss of, or material decline in ordersfrom, these customers would have a material adverse effect on our business,financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 65% of sales in the first quarter of 2005and 64% of sales in the first quarter of 2004.

 

We sell products to dealers,end-users, and OEMs in the United States, Canada, Europe, and Asia as well asin other foreign markets.  Sales withinthe United States accounted for approximately 52% of first quarter sales in2005 and 59% of first quarter sales in 2004. Sales outside of the United States accounted for 48% of first quartersales in 2005 and 41% of first quarter sales in 2004.  Sales to customers in the Netherlands,including the European distribution facility for one of our OEM customers,accounted for 11% of our first quarter sales in 2005 and 10% of our firstquarter sales in 2004.  No other countryaccounted for more than 10% of sales in the first quarter of either 2005 or2004.

 

With continued industry-wideinitiatives to reduce all channel inventories and to shorten lead times, trendswith our major customers are, generally, to reduce the number of weeks offorward-committed firm orders. This trend continues to affect our business withcertain distributors, OEMs and other server manufacturers, and we believethat it will continue to make our future sales more difficult to predict andinventory levels more difficult to manage.

 

Wecontinue to experience significant price competition in the market for all ofour products, and we expect that pricing pressures will continue in thefuture.  In addition, general economicconditions are not predictable, and we expect our revenue growth rate to fluctuatein relation to economic conditions and IT related spending trends.  Depending on future general economicconditions and other factors, our revenue could decline in the future.

 

Manyof our executive officers and directors are vested in significant amounts ofoptions to purchase shares of our common stock and continue to vest inadditional shares on a regular basis. These officers and directors have informed us that they have sold, andmay sell additional, shares of our common stock to provide liquidity anddiversify their portfolios.

 

**Results of Operations**

 

                Thefollowing table sets forth, for the periods indicated, selected statement ofoperations data expressed as a percentage of net sales:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **April 1,  2005**     | ** ** | **April 2,  2004** | ** ** |
| Net sales                                             |       | 100.0                  | %          | 100.0 | % |
| Cost of sales                                         |       | 43.3                   |       | 41.8 |   |
| Gross profit                                          |       | 56.7                   |       | 58.2 |   |
| Operating expenses:                                   |       |                   |       |   |   |
| Research and development expenses                     |       | 18.8                   |       | 11.0 |   |
| Acquired in-process research and development expenses |       | —                 |       | 7.5 |   |
| Selling, general and administrative expenses          |       | 29.0                   |       | 23.6 |   |
| Amortization of intangible assets                     |       | 8.6                    |       | 5.5 |   |
| Total operating expenses                              |       | 56.4                   |       | 47.6 |   |
|                                                  |       |                   |       |   |   |
| Income from operations                                |       | 0.3                    |       | 10.6 |   |
| Net investment income                                 |       | 2.6                    |       | 1.5 |   |
| Net realized investment losses                        |       | (0.2                   | )          | (0.1 | ) |
| Other income (expense), net                           |       | 0.1                    |       | (0.1 | ) |
| Income before provision for income taxes              |       | 2.8                    |       | 11.9 |   |
| Provision for income taxes                            |       | 0.4                    |       | 2.0 |   |
| Net income                                            |       | 2.4                    | %          | 9.9 | % |

** **

 

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*Net sales.*  Our net sales consist of sales ofkeyboard, video, and mouse console switching systems, digital connectivitysolutions, serial connectivity devices, wireless extension products, IPMI,extension and remote access and management solutions.  Net sales decreased 11%to $76.8 million for the first quarter of 2005 from $86.1 million for the firstquarter of 2004.  The decrease in salesresulted primarily from the decline experienced in our U.S. branded sales inthe first quarter of 2005 as compared to the first quarter of 2004.  Overall, branded sales declined 28% from$50.7 million in the first quarter of 2004 to $36.7 million in the firstquarter of 2005.  As a percentage ofsales, branded revenue accounted for 48% of sales in the first quarter of 2005and 59% of revenue in the first quarter of 2004.  Partially offsetting the disappointingbranded results in the U.S., OEM sales grew 13% from $35.4 million in the firstquarter of 2004 to $40.1 million in the first quarter of 2005.  OEM saleswere 52% of sales for the first quarter of 2005, compared to 41% of sales forthe first quarter of 2004.  The reasonsfor our disappointing branded results were varied.  The most significant factor was the launch ofour DSView3 management software and several new appliance products that keptour sales and reseller forces in training and away from our customers for muchof January and created some confusion in the marketplace.  In addition, an order for a large customerthat we had anticipated to occur in the first quarter of 2005 wasdeferred.  Finally, we experiencedgreater than expected seasonal softness in the OEM market, with a substantialportion of the softness attributable to one customer.  These factors, when combined with increasedcompetition in the marketplace, worked together to cause the decline inrevenue.  Sales of our digital productsrepresented 50% of our revenue in the first quarter of 2005 as compared to 44%of our revenue in the first quarter of 2004, with this shift coming in largepart from our OEM customers. Additionally, our embedded KVM offerings and our IPMI managementsolutions contributed $3.8 million in revenue in the first quarter of 2005 ascompared to less than $100,000 of revenue in the first quarter of 2004.

 

International sales increased 6%, to $36.8 million inthe first quarter of 2005 from $34.9 million in the first quarter of 2004.   Primarily as a result of the reduction in USbranded sales, sales within the United States decreased 22% to $40.0 million inthe first quarter of 2005 from $51.2 million in the first quarter of 2004.    Sales within the United States were 52% ofsales in the first quarter of 2005, compared to 59% of sales for the firstquarter of 2004. International sales were 48% of sales in the first quarter of2005 and 41% of sales for the first quarter of 2004.

 

Revenue for the first quarter of 2005 was lower thananticipated.  We have seen mixed economicindicators during the past quarter, which adds to uncertainty regarding ourability to predict the results for all of 2005. However, we believe our productplatforms position us to grow our overall business from present levels.  We have re-launched our DSView3 software witha simplified pricing and packaging structure and increased product training forour reseller network. Early feed-back from the re-launch has beenpositive.  Based on feedback from oursales force, the continuing positive contribution of our digital products andexpected increased contributions from our embedded solutions should improve ourrevenue for the second quarter of 2005. Accordingly, for the second quarter of 2005, we expect revenue to be inthe $84 to $87 million range.

 

*                Gross profit.*Gross profit may be affected by a variety offactors, including: the ratio of sales among our distribution channels, as OEMsales have lower gross margins than our branded sales; absorption of fixedcosts as sales levels fluctuate; product mix, raw materials, and labor costs;new product introductions by us and by our competitors; and the level of ouroutsourcing of manufacturing and assembly services.  Grossprofit decreased to 56.7% in the first quarter 2005 as compared to 58.2% in thefirst quarter of 2004.  The primaryreason for reduced margins in 2005 relates to the effect of lower revenue inthe first quarter of 2005. The lower level of revenue affected the ability tocover the fixed costs related to procurement, warehousing, and shipping.  Offsetting the impact of lowered revenue wasthe increased sales as a percentage of total sales of our digital solutions inthe first quarter of 2005 as compared to the first quarter of 2004.  Our digital solutions carry higher marginsthan our analog solutions.

 

We expect continued positive contributions fromour digital products and higher revenues from our embedded solutions in thesecond quarter of 2005.  We expect thecombination of these two factors to offset expected price declines, the additionalcosts expected from complying with new environmental regulations and competitive factors in the second quarter of2005.  Accordingly, we expect grossmargins to average between 56% and 57% in the second quarter of 2005.

 

                *Research anddevelopment expenses.*  Research and development expenses includecompensation for engineers, support personnel, outside contracted services andmaterials costs, and are expensed as they are incurred.  Research and development expenses were $14.5million, or 18.8% of net sales, in the first quarter of 2005 compared to $9.4million, or 11.0% of net sales, for the first quarter of 2004.  The increase in the amount spent on researchand development is due to increased labor costs and costs of certification andtesting as we continued to develop product enhancements and updates to ourdigital, analog and embedded products lines. In certain instances, contracted labor was utilized to supplement ourengineering staff to meet deadlines. Increases in labor expenses were also caused by annual pay increasesthat took effect on January 1 as well as additional headcount as a result ofthe three acquisitions completed in 2004. We believe that the timely development of innovative products andenhancements to existing products is essential to maintaining our competitiveposition.

 

We anticipate implementing plans to slow down growth in research anddevelopment spending in the second quarter of 2005.  However, due to the timing of these changes,most of the benefit will not be apparent until the third quarter of 2005.  Considering commitments already in place,research and development expenses in the second quarter of 2005 are expected tobe up to $500,000

 

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higherthan the first quarter of 2005

 

*Acquired in-process research anddevelopment expense.*  Acquisition related expenses in 2004 are comprisedsolely of the non-recurring write-off of$6.5 million of in-process research and development expense related to theacquisition of Crystal Link. There were no such charges in the first quarter of2005.

 

***Selling, general and administrative expenses.***  Selling,general and administrative expenses include personnel costs for administration,finance, information systems, human resources, sales and marketing and generalmanagement, as well as some merger and acquisition related expenses, rent,utilities, legal and accounting expenses, bad debts, advertising, promotionalmaterial, trade show expenses and related travel costs.  Selling, general and administrative expenseswere $22.3 million, or 29.0% of net sales, for the first quarter of 2005compared to $20.3 million, or 23.6% of net sales, for the first quarter of2004.  The increase in selling, generaland administrative expenses is attributed to higher costs associated withSarbanes-Oxley Act of 2002 compliance and higher legal fees associated withobtaining and protecting our intellectual property rights.  We experienced higher advertising andpromotion costs as we continue to promote DSView3 and other products introducedin late Q4 2004 and Q1 2005.

** **

**Weexpect our selling, general and administrative expenses to be flat in thesecond quarter of 2005 as compared to the first quarter of 2005. We expectcosts of Sarbanes-Oxley compliance to decline in the second quarter of 2005;however we plan to continue to invest more in promoting our brand and our newproducts.  In addition, legal costs areexpected to rise in the second quarter of 2005 as one of our patent protectioncases is scheduled for trial during the second quarter of 2005.**

** **

***Amortization of intangible assets***. Amortization of $6.6 million in the first quarter of 2005 is comprisedof the amortization of the identifiable intangible assets created as a resultof the merger transaction between Apex and Cybex and the acquisitions ofEquinox, 2C, Soronti, Crystal Link, OSA, and Sonic Mobility. Amortization of $4.8 million in the firstquarter of 2004 is comprised of the amortization of the identifiable intangibleassets created as a result of the merger transaction between Apex and Cybex andthe acquisitions of Equinox, 2C, Soronti and Crystal Link.  The increase in amortization expense relatesprimarily to the addition of intangibles from the three acquisitions completedduring 2004.

** **

*Net investment income**.** *Net******investmentincome increased to $2.1 million in the first quarter of 2005 as compared to$1.2 million in the first quarter of 2004. The improved results were the resultof higher interest rates on investments resulting in higher returns for thefirst quarter of 2005.

 

*Net realized investment losses. *Net realizedinvestment losses increased from $64,000 in the first quarter of 2004 to$177,000 in first quarter of 2005.

 

*Other expense, net.*  Net other expense improved froman expense of $50,000 in the first quarter of 2004, to income  of $61,000 in the first quarter of 2005.

 

*Provision for income taxes.*  The provision for income taxeswas approximately $319,000 for the first quarter of 2005, compared to $1.7million in the first quarter of 2004. The effective tax rate in the first quarter of 2005 was approximately14.8% compared to an effective tax rate of approximately 16.4% in the firstquarter of 2004.  The reduction in oureffective tax rate was partly the result of the change in mix of our pre-taxprofit among our U.S. and international companies.   As a result of lower than expected earningsin the U.S. in the first quarter, the pre-tax profit attributable to theInternational operations was higher than that experienced in recentquarters.  Our international operationsin Ireland are generally taxed at lower income tax rates than our U.S.operations. In addition, the provision for income taxes for the first quarterof 2005 was reduced by approximately $133,000 related to a tax benefit expectedto be realized from the settlement of a tax contingency.

 

*                Netincome.*  Netincome for the first quarter of 2005 was $1.8 million compared to $8.5 millionfor the first quarter of 2005, as a result of the above factors, including thedecrease in our revenues and our margins, increases in selling, general andadministrative charges and research and development expenses and the increasein intangible amortization  expense as aresult of our latest acquisitions.  Netincome as a percentage of sales for the first quarter of 2005 was 2.4%,compared to 9.9% for the first quarter of 2004.

 

**Liquidity and Capital Resources**

 

                As of April 1, 2005, ourprincipal sources of liquidity consisted of $324 million in cash, cashequivalents, and investments.  We have nooutstanding debt or available credit facilities as of this filing.

 

                Our operating activitiesgenerated cash of over $10 million in the first three months of 2005, comparedto approximately $13 million in the first three months of 2004.  The reduction in positive cash flow is theresult of a decrease in earnings combined with an increase in inventories.  Inventoriesincreased from $21.2 million at December 31, 2004 to $24.3 million at April 1,2005.  The increase in 

 

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inventorywas primarily the result of adding inventory related to our recent productintroductions and in anticipation of expected higher sales.  Accordingly, as a result of the lower salesvolume and the increased inventories, our inventory turns declined to 5.5 forthe first quarter of 2005 from 6.2 in the first quarter of 2004.  We will continue to monitor our inventoryclosely and expect our inventory turns to return to a more normal level assales volume increases.  Our decrease inreceivables positively impacted cash flows for the quarter as accountsreceivable decreased from $60.9 million at December 31, 2004 to $50.0 millionat April 1, 2005.  Although ourreceivables balanced declined, our DSOs increased to 59 days, slightly betterthan our goal of 60 days. DSOs increased as a result of the increasing salesthat occurred late in the first quarter of 2005.  However, our accounts receivable agingremains strong, with only 1% of the balance greater than 30 days past due.   A decline in accrued compensation andaccounts payable also affected cash flow from operations for the first quarterof 2005.

 

In the ordinary course of our business, we may at any point in timehave a significant amount of contractual commitments not yet recognized in ourfinancial statements. These commitments relate primarily to our need toschedule the purchase of inventories in advance of the related forecasted salesto customers. We have longer lead times for the products we purchase fromsuppliers based in Asia than those for our U.S. based and European suppliers.Our actual contractual commitments are typically limited to products needed forone to three months of forecasted sales. The liabilities for these inventorypurchases along with the related inventory assets are typically recognized uponour receipt of the products. We also have at any point in time a variety ofshort term contractual commitments for services such as advertising, marketing,accounting, legal, and research and development activities. The liabilities forthese services and the related expenses are typically recognized upon ourreceipt of the related services.  As ofApril 1, 2005, we had approximately $22.5 million of such commitments.  None of our expected purchase commitmentsrequire payment beyond the next year.

 

Weintend to use a portion of our cash and investments for strategic acquisitionsof technologies and companies that will enhance and complement our existingtechnologies and help increase our sales.

Werepurchased 700,000 shares of our common stock for a total cost ofapproximately $21.9 million during first quarter of 2005 under the stockrepurchase program approved by our Board of Directors during the fourth quarterof 2004.  During the period April 2, 2005through May 2, 2005 we repurchased an additional 275,000 shares under thisprogram at a total cost of approximately $6.9 million. On April 29, 2005, our Board of Directors authorizedthe repurchase of an additional two million shares of our common stock to berepurchased under the stock repurchase program. A total of four million shareshave been authorized for repurchase under the program, of which approximately1.1 million shares had been repurchased as of May 2, 2005.

 

On April 29, 2005, our Boardof Directors approved a plan to accelerate vesting of all currently outstandingstock options with an exercise price of greater than $25.00 which are unvestedon December 25, 2005.  Under theprovisions of APB 25, we estimate that there will be no compensation expenserelated to accelerating these options as the options affected by theacceleration had exercise prices higher than the closing price of our commonstock as of the modification date.  As aresult of the Board’s action, stock options to purchase approximately 1.1million shares of our common stock will become exercisable effective December25, 2005.  The exercise prices of theaffected stock options range from $25.17 to $41.57 per share.  The closing price of Avocent’s common stockon April 29, 2005 was $25.14. We expect the acceleration of these stock optionsto reduce compensation expense that would have been recorded in future periodsfollowing the adoption of SFAS 123R on January 1, 2006.  We estimate that we will save approximately$13 million in future compensation expense based on our plan to accelerate thevesting of stock options.

 

**Investments**

 

Ourinvestments consist of corporate bonds, municipal bonds, commercial paper,mortgage backed securities guaranteed by U.S. government agencies, and commonstock. We classify our debt and equity securities as available-for-salesecurities and report them at fair value, with unrealized gains and lossesexcluded from earnings and reported as a separate component of stockholders’equity. We periodically review our investment portfolio for investmentsconsidered to have sustained an other-than-temporary decline in value.   Upon review of our investment portfolio asof April 1, 2005, no investments were considered to have sustained another-than-temporary decline, and no charge was recorded in the first quarterof 2005.

** **

** **

 

**Critical Accounting Policies**

 

We believe the followingcritical accounting policies affect the more significant judgments and estimatesused in the preparation of our consolidated financial statements:

 

•                                            We reviewcustomer contracts to determine if all of the requirements for revenuerecognition have been met prior to recording revenues from salestransactions.  We generally record salesrevenue upon shipment of our products, net of 

 

 

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any discounts, since wegenerally do not have significant post delivery obligations, the product priceis fixed and determinable, collection of the resulting receivable is probable,and product returns are reasonably estimable. We generally ship products upon receipt of a purchase order from acustomer.  We record revenue in accordancewith the applicable terms of each respective customer contract.  Accordingly, revenue on products shipped FOBdestination is recorded when the customer takes possession of the goods, andrevenue on products shipped FOB shipping point is recorded when the goods leaveour facilities.  Shipping and handlingfees are included in net sales, and the related costs are included in cost ofsales in the accompanying consolidated statements of operations.

 

We generally record royaltyrevenue from OEMs upon shipment of the related products in which our softwareor firmware is embedded by the OEMs, based upon shipment data provided by theOEMs.  We generally record licenserevenue from sales of our software upon shipment or electronic transfer of thesoftware.  We generally defer revenuesfrom the sale of extended warranty agreements and software support andmaintenance agreements.  The deferredrevenue is amortized into income on a pro rata basis over the applicablecontract lives.

 

We accrue for sales returnsas a reduction of sales and cost of sales based on our experience from historicalcustomer returns, which we believe provides a reasonable estimate of futurereturns.  Our sales agreements generallyinclude a one-month unconditional return policy.  We also allow additional rights of return tocertain distributors, which generally extend the return period to 90 days.  If actual future customer returns are lessfavorable than those projected by management, additional sales return costs maybe incurred.    The reserve is includedas a reduction in the carrying value of accounts receivable in the accompanyingconsolidated balance sheets.

 

Prior toextending credit to a new customer, we perform a detailed credit review of thecustomer and establish credit limits based on the results of our creditreview.  We review collection experienceperiodically to determine if the customer’s payment terms and credit limitsneed to be revised.  We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.  If circumstances change with regard toindividual receivable balances that had previously been determined to beuncollectible (and for which a specific reserve had been established), areduction in our allowance for doubtful accounts may be required.

 

Weparticipate in cooperative advertising and market development programs withcertain distributors and OEMs. We use these programs to reimburse distributorsand OEMs for the actual costs of advertising, and in general, allowdistributors and OEMs credits up to a specified percentage of net purchases.Our costs associated with these programs are estimated and accrued at the timeof sale, and are included in sales and marketing expenses in the accompanyingconsolidated statements of operations.

 

•                                            We carry ourinventory at the lower of cost or market, with cost being determined using thefirst-in, first-out method.  We usestandard costs for material, labor, and manufacturing overhead to value ourinventory.  We review and revise ourstandard costs on a quarterly basis. Therefore, our inventory costs approximate actual costs at the end ofeach reporting period.  We write down our inventory forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions.  If actual future demand or market conditions areless favorable than those projected by management, additional inventorywrite-downs may be required.

 

•                                            We provide forthe estimated cost of product warranties at the time revenue isrecognized.  While we engage in extensiveproduct quality programs and processes, including actively monitoring andevaluating the quality of our component suppliers and contract manufacturers,our warranty obligation is affected by product failure rates, failure rates ofpurchased components integrated into our products, material usage, and otherrework costs incurred in correcting a product failure.  Should actual product failure rates, materialusage, or other rework costs differ from our estimates, revisions to ourestimated warranty liability may be required.

 

•                                            We holdinvestments in various publicly traded debt securities, includingmortgaged-backed and other asset-backed securities.  We record an investment impairment chargewhen we believe an investment has experienced a decline in value that is otherthan temporary.  Future adverse changesin market conditions or poor operating results of underlying investments couldresult in losses or an inability to recover the carrying value of theinvestments that may not be reflected in an investments current carrying value,thereby possibly requiring an impairment charge in the future.  There were no other-than-temporary impairmentcharges recorded against investments in the first quarter of 2005 or 2004.

 

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                                                We also investin privately held entities and generally record our investments in theseentities at cost or we use the equity method if we have the ability to exercisesignificant influence over the entity. We review our investments in these entities periodically to determine ifcircumstances (both financial and non-financial) exist that indicate that wewill not recover our initial investment. We record impairment charges on investments having a carrying value thatis greater than the value that we would reasonably expect to receive in anarm’s length sale of the investment.

 

**•**                                          As required by SFAS No. 142 *Goodwill and OtherIntangible Assets***,**we****test for impairment of goodwill at leastannually. Our annual test for goodwill impairment, performed in the fourthquarter of 2004 and 2003, determined that no adjustment for impairment wasrequired.  Our testing indicated that thefair value of our goodwill exceeded its carrying value; accordingly, inaccordance with SFAS 142, no further impairment analysis was required.  If economic conditions deteriorate andindicators of impairment become present, an adjustment to the carrying value ofgoodwill and other intangible assets may be required.

 

**•****                                         **We reviewlong-lived assets for impairment under the guidance prescribed by SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. We recognize impairment losses on long-livedassets used in operations when indicators of impairment are present and theundiscounted cash flows estimated to be generated by those assets are less thanthe assets’ carrying values. An impairment loss would be recognized in theamount by which the recorded value of the asset exceeds the fair value of theasset, measured by the quoted market price of an asset or an estimate based onthe best information available in the circumstances.  There were no such losses recognized duringthe first quarter of 2005 or 2004.

 

**•****                                         **We accountfor income taxes using the asset and liability method. We provide for incometaxes currently payable and, in addition, provide deferred income taxes fortemporary differences between the tax bases of assets and liabilities and theirreported amounts in the financial statements and for known contingencies.Temporary differences relate principally to the allowance for doubtfulaccounts, allowance for sales returns, liability for warranty claims,unrealized gain (loss) on investments, acquired intangible assets, accumulateddepreciation, loss on write-down of investments, and inventory reserves.Valuation allowances are established when necessary to reduce deferred tax assetsto the amount expected to be realized.

 

**Recently Issued AccountingStandards and Regulatory Standards**

 

In December 2004, the FASBissued SFAS No. 123 (revised 2004), *Share based Payme*nt,which replaces SFAS No. 123. *Accounting for Stock BasedCompensatio*n and APB Opinion No 25 *Accountingfor Stock Issued to Employees*. SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual period after June15, 2005.  The pro-forma disclosurespreviously permitted under SFAS No. 123 no longer will be an alternative toinclusion of the expense in the financial statements.  We are required to adopt SFAS 123R beginningJanuary 1, 2006.  Under SFAS 123R, wemust determine the appropriate fair value model to be used for valuingshare-based payments, the amortization method for compensation cost and thetransition method to be used at date of adoption.  The transition methods include prospectiveand retroactive adoption options. We expect to utilize the prospective methodwhich requires that compensation expense begin being recorded for all unvestedstock options and restricted stock at the beginning of the first quarter of adoptionof SFAS 123R.  We are evaluating therequirements of SFAS 123R and expect the adoption of SFAS 123R will have amaterial impact on our consolidated results of operations and earnings pershare.  We have not determined the effectof adopting SFAS 123R and we have not determined whether the adoption willresult in amounts similar to the current pro-forma disclosures under SFAS 123.Under the current approach of SFAS 123 we would have unamortized fair value ofunvested stock options of approximately $15 million for currently outstandingstock options to be recognized as expense in our income statements after 2005,prior to the acceleration of vesting discussed above.  Following this acceleration we believe thebalance to be expensed in future periods would be reduced to approximately $2million for currently outstanding stock options under the SFAS 123 methodology.

 

On October 22, 2004, the American Jobs CreationAct of 2004 became law. This legislation repeals export tax benefits, whichhave historically reduced our effective tax rate. This legislation phases inthe repealed export tax benefits by allowing 100 percent of the repealed exportbenefits in 2004, 80 percent in 2005 and 60 percent in 2006. We do not expectthis change to have a material impact on our effective tax rate or provisionfor taxes.

 

The legislation also transitions in a new taxdeduction for qualifying U.S. manufacturing activities. Under the guidance inFASB Staff Position No. FAS 109-1 which articulates the application of SFAS109, “Accounting for Income Taxes,” to the tax deduction on qualifiedproduction activities provided by the Act, the deduction will be treated as a“special deduction” as described in SFAS 109. As such, we expect the newmanufacturing activities deduction provision of the new legislation will reduceour effective rate in future periods as the deduction is taken on our taxreturns.

 

 

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The legislation also provides for the optionalrepatriation of earnings from foreign subsidiaries allowing an 85 percentdividends received deduction. The deduction is subject to a number oflimitations.   We have not yet initiatedan analysis nor determined if we will repatriate any overseas earnings pursuantto this provision.  If our intention topermanently reinvest overseas earnings in our overseas operations changes andwe decide to repatriate any of the earnings to the U.S., we would incuradditional income tax expense equal to the incremental U.S. income tax inexcess of the credits available for taxes already paid overseas.

 

**Item 3.****Quantitative and Qualitative Disclosures About Market Risks.**

 

Our primary market risk is the potential loss arisingfrom increases in interest rates, which could have an adverse impact on thefair value of our investment securities. Our investment policy is to manage ourinvestment portfolio to preserve principal and liquidity while maximizing thereturn on our investment portfolio through the investment of available funds.We diversify our investment portfolio by investing in a variety of highly-ratedinvestment-grade securities and through the use of different investmentmanagers. Our investment securities portfolio is primarily invested insecurities with maturities (or interest rate resets) of two years or less withat least an investment grade rating to minimize interest rate and credit riskas well as to provide for an immediate source of funds. Market risk, calculatedas the potential change in fair value in our investment portfolio resulting froma hypothetical 10% change in interest rates, was not material at April 1, 2005.We generally hold investment securities until maturity.

 

We also face foreign currency exchange rate risk to theextent that the value of certain foreign currencies relative to the U.S. dollaraffects our financial results.  Ourinternational operations transact a portion of our business in currencies otherthan the U.S. dollar, predominantly the euro, and changes in exchange rates maypositively or negatively affect our revenues, gross margins, operatingexpenses, and retained earnings since these transactions are reported by us inU.S. dollars.  We occasionally purchaseforeign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies. As of April 1,2005, we had one open forward contract with a fair value of zero..

 

**Item 4.****Controls and Procedures.**

 

(a)*Evaluation of disclosure controls andprocedures.*    Based on theirevaluation as of April 1, 2005, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

(b)*Changes in internal control over financialreporting*.    There were nochanges in our internal controls over financial reporting during the quarterended April 1, 2005 that materially affected or is reasonably likely tomaterially affect, our internal controls over financial reporting. However, wedid extend our ERP system to our location in San Jose, California, which hasenhanced our internal control over financial reporting through the automationand standardization of certain controls and processes, as all of ourfinancially significant locations are now operating under the same ERP system.We also created a new corporate treasurer position during the first quarter of2005 to provide enhanced oversight of our investments, tax planning, and riskmanagement activities.

 

 

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### **PARTII — OTHER INFORMATION**

 

**Item 1.    Legal Proceedings.**

 

In May 2001, we filed acomplaint for patent infringement in the United States District Court for theSouthern District of New York against Raritan Computer Inc. The Raritancomplaint sought injunctive relief, damages, attorneys’ fees and costs underthree patents.  After a seven day benchtrial in New York in January of 2002, U.S. District Judge Milton Pollack foundthat there was no infringement of these patents by Raritan and ordered thatjudgment be entered in favor of Raritan.

 

In April 2003, the UnitedStates Court of Appeals for the Federal Circuit issued its ruling on our appealin this patent litigation.  The Court ofAppeals ruled in our favor by vacating the non-infringement decision of the DistrictCourt for the Southern District of New York and remanding the case for furtherproceedings consistent with the Court of Appeals’ opinion.

 

InSeptember 2003, Raritan petitioned the United States Supreme Court for a Writof Certiorari to review the Court of Appeals decision.  The Supreme Court declined to reviewRaritan’s petition in December 2003, and the case was sent back to the UnitedStates District Court for the Southern District of New York. A Markman hearingon claims construction was held in February 2005. This case is currently scheduledfor trial in May 2005.

 

InOctober 2003, we filed a complaint for patent infringement in the United StatesDistrict Court for the Northern District of Alabama against ClearCubeTechnology, Inc.  The ClearCube complaintseeks injunctive relief, damages, attorneys’ fees, and costs under three of ourpatents. ClearCube has filed counterclaims alleging non-infringement,unenforceability, invalidity, and misuse of the Avocent patents. A Markmanhearing on claims construction was originally set for February 2005, but inresponse to an inquiry from the Court, we agreed that the hearing should bepostponed until the United States Court of Appeals for the Federal Circuitissues its ruling on certain similar issues raised in an unrelated patent case.

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds.**

In the fourth quarter of2004 our Board of Directors approved a stock repurchase program whereby we may,from time to time, to purchase up to two million shares of our common stock inthe open market, in privately negotiated transactions or otherwise, at pricesthat we deem appropriate.  The plan hasno expiration date. Details of purchases made during the quarter ended April 1,2005 are as follows:

 
| **Period:**                               | ** ** | **Total Number of  Shares Purchased  During the Period** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Cumulative  Number of  Shares Purchased as Part of Publicly  Announced Plan** | ** ** | **Maximum Number of Shares  Remaining to  Purchase Under the  Plan (1)** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                                      |       |                                                     |       |                              |       |                                                                                  |       |                                                                          |       |
| January 1, 2005 — January 31, 2005   |       | 195,600                                                  |       | $                                 | 36.04      |                                                                                  | 295,600    |                                                                          | 1,704,400  |   |
| February 1, 2005 — February 28, 2005 |       | 154,400                                                  |       | $                                 | 35.41      |                                                                                  | 450,000    |                                                                          | 1,550,000  |   |
| March 1, 2005 — April 1, 2005        |       | 350,000                                                  |       | $                                 | 26.70      |                                                                                  | 800,000    |                                                                          | 1,200,000  |   |
|                                      |       |                                                     |       |                              |       |                                                                                  |       |                                                                          |       |
| Totals                                    |       | 700,000                                                  |       | $                                 | 31.23      |                                                                                  |       |                                                                          |       |   |

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(1)   Does not include theadditional two million shares approved by our Board of Directors for our stockrepurchase program on April 29, 2005. A total of four million shares is nowauthorized to be repurchased under the board approved program.

**Item 6.    Exhibits.**

(a) Exhibits

**31.1        **Sarbanes-OxleyAct of 2002 Section 302(a) Certification of the Chief Executive Officer

** **

**31.2        **Sarbanes-OxleyAct of 2002 Section 302(a) Certification of the Chief Financial Officer

** **

32.1                         Certification of the Chief Executive Officer and the Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

 

ITEMS 3, 4, AND 5 ARE NOT APPLICABLE AND HAVEBEEN OMITTED.

 

 

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### **SIGNATURE**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |        | AVOCENT CORPORATION                                            |
|--------|-------------|----------------------------------------------------------------|
|   |        | (Registrant)                                                   |
|   |        |                                                           |
|   |        |                                                           |
|   |        |                                                           |
| Date:  | May 9, 2005 | /s/ Douglas E. Pritchett                                       |
|   |        | Douglas E. Pritchett                                           |
|   |        | Executive Vice President of Finance, Chief Financial           |
|   |        | Officer and Assistant Secretary (Principal Financial  Officer) |

 

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